Unit 6: Basis

Question 1

What is “real property”?

Answer 1

Real property refers to real estate, which includes land and anything permanently attached to it. Examples include buildings, farmland, residential homes, commercial properties, rental properties, and subsurface mineral rights.

Question 2

What is “personal property”?

Answer 2

Personal property encompasses all assets that are not classified as real estate. This includes furniture, equipment, vehicles, household goods, collectibles, and livestock. It also covers intangible assets like stocks, trademarks, cryptocurrency, and copyrights.

Question 3

What is the difference between “personal property” and “personal-use property”?

Answer 3

“Personal property” is a legal term for any movable asset whether used for business or not. “Personal-use property” specifically refers to assets used personally by the taxpayer and not for trade, business, or investment.

Question 4

What is “basis” in general?

Answer 4

The original basis of an asset is typically its purchase price. In some cases, basis might be calculated based on fair market value at the time of acquisition, such as when property is inherited or gifted.

Question 5

What costs can be included in the cost basis of an asset?

Answer 5

Cost basis can include sales taxes, freight-in charges, shipping fees, installation costs, testing fees, delinquent real estate taxes paid by the buyer, cost of major improvements, and legal/accounting fees for transferring an asset.

Question 6

Ambrosio purchases a new vehicle for $15,000. He pays $1,200 in sales tax and a $210 delivery charge to have the car shipped from a dealership in another state. What is his basis in the vehicle?

Answer 6

Ambrosio’s basis is $16,410 ($15,000 + $1,200 + $210).

Question 7

Cassandra, a self-employed copywriter, buys a laptop for her home office costing $3,540 with $194 in sales tax. What is her basis in the computer?

Answer 7

Cassandra’s basis in the computer is $3,734 ($3,540 + $194). This is also her basis for depreciation.

Question 8

What post-acquisition costs can increase the basis of an asset?

Answer 8

Post-acquisition costs that can increase basis include: costs of extending utility service lines, impact fees, legal fees for perfecting title, legal fees for decreasing assessments for local improvements, zoning costs, and capitalized value of redeemable ground rent.

Question 9

Titus spent $45,000 to purchase farmland. He faces a title dispute and hires an attorney for $7,800 to defend his ownership. What is his adjusted basis for the property?

Answer 9

Titus’s adjusted basis increases to $52,800 (original $45,000 plus legal fees of $7,800).

Question 10

Calix buys a house for $120,000 as a personal residence. Four months later, he paves the driveway for $9,000. What is his adjusted basis?

Answer 10

Calix’s adjusted basis in the home is now $129,000 ($120,000 original cost + $9,000 for major improvements).

Question 11

What is depreciation and how does it affect basis?

Answer 11

Depreciation is a tax deduction allowing businesses to gradually recoup the cost of assets over time. It decreases the basis of an asset over several years, accounting for wear and tear, deterioration, or obsolescence.

Question 12

What types of property cannot be depreciated?

Answer 12

Land cannot be depreciated, though most tangible assets like buildings, machinery, vehicles, furniture, and equipment can be depreciated.

Question 13

What determines an asset’s holding period?

Answer 13

The holding period begins the day after acquisition and ends on the day of sale. This period determines whether any gain or loss will be considered long-term or short-term.

Question 14

What is the difference between short-term and long-term property?

Answer 14

Short-term property is held for one year or less. Long-term property is held for more than one year (at least a year plus a day).

Question 15

What information is needed to report taxable gain or loss from an asset sale?

Answer 15

You need to identify: whether the asset is personal-use or used for business/investment; the asset’s basis or adjusted basis; the holding period; and the proceeds from the sale.

Question 16

Kenji purchased 75 silver coins for $23 each plus $67 in sales tax on January 1, 2024. He sold them for $1,900 on November 5, 2024. What is his capital gain and how is it classified?

Answer 16

Kenji’s basis is $1,792 ([$23 × 75] + $67). His gain is $108 ($1,900 - $1,792). This is a short-term capital gain taxed at ordinary income rates because he held the coins for less than a year.

Question 17

Denise bought 500 shares of stock on January 1, 2024. If she sells on January 1, 2025, how is her capital gain/loss classified?

Answer 17

If sold on January 1, 2025, her gain/loss would be short-term. If sold on January 2, 2025 (one year plus one day), her gain/loss would be long-term.

Question 18

What additional costs might be included in the basis of real estate beyond purchase price?

Answer 18

Additional costs might include delinquent real estate taxes paid by the buyer, construction expenses, payments to contractors, building materials, inspection fees, land preparation expenses, demolition costs, legal fees, recording fees, abstract fees, and land survey costs.

Question 19

Millie sells her home to Anthony for $125,000. Anthony agrees to pay $3,500 in delinquent property taxes. What is Anthony’s basis in the home?

Answer 19

Anthony’s basis is $128,500 ($125,000 + $3,500 delinquent taxes).

Question 20

Dianne pays $50,000 for an empty lot, $2,800 to remove tree stumps, and $6,700 to demolish an existing concrete foundation. What is her basis in the land?

Answer 20

Dianne’s basis in the land is $59,500 ($50,000 + $2,800 + $6,700).

Question 21

What closing costs can be included in a property’s basis?

Answer 21

Closing costs that can be included in basis: abstract fees, utility installation charges, legal fees (title search and deed preparation), recording fees, land surveys, transfer taxes, owner’s title insurance, and other amounts the seller legally owes that the buyer agrees to pay.

Question 22

What settlement costs cannot be included in a property’s basis?

Answer 22

Fees incidental to getting a loan (points) and amounts placed in escrow for future payments of items like taxes and insurance cannot be included in basis.

Question 23

How is basis determined for property received in exchange for services?

Answer 23

When property is received for services, the property’s fair market value is reported as income and becomes the basis. If two parties agreed on a price for services beforehand, this agreed-upon cost determines both the income amount and asset basis.

Question 24

Jeremy, a CPA, prepares a tax return for Maryanne. When she can’t pay his $400 bill, she offers an antique vase worth $525, which Jeremy accepts. What is Jeremy’s basis in the vase?

Answer 24

Jeremy’s basis in the vase is $400, the amount of the invoice that was agreed upon beforehand by both parties.

Question 25

What happens to basis after a casualty loss?

Answer 25

After a deductible casualty loss, basis increases by amounts spent on repairs restoring the property to pre-casualty condition. However, basis decreases by any related insurance proceeds received.

Question 26

Giovanni paid $5,000 for a truck that was later damaged in a hailstorm. He spends $3,000 on repairs with no insurance coverage. What is his new basis in the truck?

Answer 26

Giovanni's new basis is $8,000 ($5,000 original cost + $3,000 restoration repairs).

Question 27

What is basis after mortgage assumption?

Answer 27

When buying property and assuming an existing mortgage, basis includes the amount paid for the property plus the amount owed on the mortgage, plus settlement fees and closing costs.

Question 28

Sabrina purchases her cousin's office building for $220,000 cash and assumes his existing $800,000 mortgage. What is her basis in the building?

Answer 28

Sabrina's basis is $1,020,000 ($220,000 cash + $800,000 mortgage assumption).

Question 29

How is the basis of securities determined?

Answer 29

The basis of securities is usually the cost plus additional fees such as brokers' commissions. Form 1099-B shows transaction proceeds but may not include basis information, which the taxpayer must provide from personal records.

Question 30

What is the "specific identification" method for selling shares?

Answer 30

When selling shares, a taxpayer can specify which set or portion they wish to sell. This helps calculate holding periods and values of sold stock, giving greater control over identifying profits/losses when selling a portion of an investment.

Question 31

What is the FIFO (First In, First Out) method for selling shares?

Answer 31

If the taxpayer cannot identify a specific set of shares at the time of sale, shares sold are considered to be from the earliest set purchased (First In, First Out).

Question 32

Sharleen buys 400 shares of stock on May 1, 2022, for $11,200 and 400 more shares on June 1, 2022, for $12,000. On June 20, 2024, she sells 400 shares for $11,500 without specifying which block. What is her capital gain/loss?

Answer 32

Using FIFO, the shares are treated as coming from the earliest block (May 1, 2022). Sharleen realizes a long-term capital gain of $300 ($11,500 - $11,200).

Question 33

How do stock dividends affect basis?

Answer 33

Stock dividends (additional shares granted instead of cash dividends) are typically nontaxable. They increase the number of shares owned, spreading the original basis over more shares, decreasing the basis per individual share. The total basis remains the same.

Question 34

How do stock splits affect basis?

Answer 34

In a stock split, a company issues additional shares for every existing share. This lowers the basis per individual share (e.g., in a 2-for-1 split, basis per share is halved), though the total basis remains the same.

Question 35

Leticia pays $1,050 for 100 shares plus a $50 broker's commission. Later, she receives 10 shares as a nontaxable stock dividend. What is her new basis per share?

Answer 35

Her initial basis was $1,100 ($1,050 + $50) or $11 per share. After receiving 10 additional shares, her basis per share decreases to $10 ($1,100 ÷ 110 shares).

Question 36

Irwin buys 100 shares at $50 per share ($5,000 total). After a 2-for-1 stock split, what is his new basis per share?

Answer 36

Irwin's new basis per share is $25 ($5,000 ÷ 200 shares). His total basis remains $5,000.

Question 37

What are stock options?

Answer 37

Stock options allow an investor to buy or sell a stock at a predetermined price. They can result in gains/losses from trading the option itself or from buying/selling the underlying securities after exercising the option.

Question 38

What are the two types of stock options?

Answer 38

1) Statutory stock options: granted under employee stock purchase plans (ESPP) or incentive stock option (ISO) plans. 2) Nonstatutory stock options: options not granted under an ESPP or ISO plan.

Question 39

How are statutory stock options taxed?

Answer 39

With statutory options, income is not reported when the option is granted or exercised. Income is only reported once the stock is ultimately sold.

Question 40

How are nonstatutory stock options taxed?

Answer 40

With nonstatutory options, the taxpayer recognizes taxable wage income upon exercise. The taxable income is the difference between the fair market value on the exercise date and the option price, reported on Form W-2.

Question 41

Annamaria participates in her employer's ESPP. $5 is deducted weekly for 48 weeks ($240 total). Stock value was $25 when granted but $20 when exercised. She receives 12 shares. What is her basis per share?

Answer 41

Annamaria's basis is $20 per share. Her holding period begins the day after exercise, even though the money was deducted on different days.

Question 42

How is basis determined when property is transferred between spouses due to divorce?

Answer 42

When property is transferred between spouses due to divorce, the recipient's adjusted basis remains the same as the original owner's. There are typically no tax implications, regardless of whether the transfer was for cash, marital rights, liability assumption, or other considerations.

Question 43

What is the timeframe for property transfers related to divorce to qualify for nonrecognition treatment?

Answer 43

For property transfers related to divorce, the transfer generally must occur within one year after the date the marriage ends to qualify for nonrecognition treatment.

Question 44

Quinton transfers a vacation home to Adrienne as part of their divorce agreement. His adjusted basis was $285,000, and FMV was $550,000. What is Adrienne's basis?

Answer 44

Adrienne's basis is $285,000, the same as Quinton's basis before the transfer.

Question 45

Adelynn and Graham jointly owned an antique Porsche with a basis of $50,000 and FMV of $150,000. Upon divorce, Adelynn transfers her interest to Graham. What is Graham's basis?

Answer 45

Graham's basis is $50,000, the same as their original joint basis.

Question 46

How is the basis of gifted property determined?

Answer 46

Generally, the basis of gifted property for the donee equals the donor's adjusted basis (called a "transferred basis"). The holding period of the gift also transfers to the donee.

Question 47

What information is needed to determine the basis of gifted property?

Answer 47

To determine the basis of gifted property, you need: the donor's adjusted basis in the property when gifted, its fair market value on the date of the gift, and the amount of gift tax the donor paid (if any).

Question 48

Matteo buys a collectible stamp for $1,000 on February 2, 2024, and gives it to his daughter Anne on April 2. She sells it on May 2 for $1,500. What is her gain and how is it classified?

Answer 48

Anne has a $500 short-term capital gain ($1,500 - $1,000). The combined holding period of Matteo (2 months) and Anne (1 month) is less than a year, so it's short-term.

Question 49

Madden sells 600 shares of stock gifted by his father for $1,600. His father originally paid $1,455. What is Madden's gain or loss?

Answer 49

Madden reports a long-term capital gain of $145 ($1,600 - $1,455), using his father's basis.

Question 50

What is a "dual basis" for gifted property?

Answer 50

When the fair market value of gifted property at the time of the gift is less than the transferred basis, the donee has a "dual basis": one basis for determining gain (transferred basis) and a different basis for determining loss (FMV at time of gift).

Question 51

Under what circumstances does the sale of gifted property result in no gain or loss?

Answer 51

No gain or loss is recognized when sale proceeds are greater than the gift's FMV but less than the transferred basis, in situations where the FMV at the time of gift is less than the transferred basis.

Question 52

Noah's aunt Fatima gives him 100 shares of stock with an original basis of $9,200 ($92/share) when its FMV is $7,000 ($70/share). If Noah sells for $11,000, what is his gain or loss?

Answer 52

Noah would report a gain of $1,800 ($11,000 - $9,200), using his aunt's basis to determine gain since he sold for more than the original basis.

Question 53

Using the previous scenario, if Noah sells the shares for $4,500, what is his gain or loss?

Answer 53

Noah would report a loss of $2,500 ($7,000 - $4,500), using the FMV at the time of gift to determine loss since he sold for less than that amount.

Question 54

Using the same scenario again, if Noah sells the shares for $8,000, what is his gain or loss?

Answer 54

Noah would recognize no gain or loss. Since the sale price ($8,000) is between the FMV at time of gift ($7,000) and the donor's basis ($9,200), neither gain nor loss is recognized.

Question 55

How is the basis of inherited property determined?

Answer 55

In most cases, the basis of inherited property is the fair market value on the date of the decedent's death, regardless of what the deceased paid or the adjusted basis before death. This is called a "stepped-up" basis.

Question 56

How is the holding period classified for inherited property?

Answer 56

When a beneficiary sells inherited property, it is always deemed to have a long-term holding period, regardless of how long the beneficiary actually held it.

Question 57

What is a "stepped-down" basis?

Answer 57

Although property values typically increase over time, when an inherited property's value has declined below what the deceased paid, the heir receives a "stepped-down" basis equal to the lower fair market value at the time of death.

Question 58

Libby inherits 300 shares of stock that her uncle purchased for $850 twenty years ago. At his death, the shares were valued at $19,000. Three months later, she sells for $21,000. What is her gain/loss and how is it classified?

Answer 58

Libby has a long-term capital gain of $2,000 ($21,000 - $19,000). Although she held the stock for less than a year, inherited property qualifies for long-term treatment.

Question 59

Norbert purchased a home for $240,000 that declined in value to $198,000 by his death. His daughter Nikki inherits the home. What is her basis?

Answer 59

Nikki's basis is $198,000, a "stepped-down" basis equal to the FMV at the time of death.

Question 60

What is the "alternate valuation date" for inherited property?

Answer 60

A special rule allows the estate's personal representative to elect a valuation date six months after the date of death. This alternate date can be chosen if the estate's value and related estate tax would be less than on the date of death.

Question 61

What happens if the alternate valuation date is elected but assets are distributed earlier?

Answer 61

If the alternate valuation date is elected but assets are distributed less than six months after death, the basis is the fair market value as of the date the asset was distributed to the heir.